Reconciliation Bill: Obama Student Loans Program

March of 2010 was a busy time for legislators in the United States. In addition to passing a budget reconciliation bill, legislators also passed bills that reformed health care (though that process is still in flux) and the student loan system. While the health care overhaul part of this work dominated the news coverage and will remain a political issue for quite some time, the bill dealing with student loans could have an even bigger impact on people hoping to get a degree in the years to come. The bill might even help people who have already graduated. Because we wouldn’t want you to read through the bill yourself (not that you would, of course), we have the Cliffs Notes version below, so you can learn how your college financing might change.

Different Funding Sources

Prior to 2010, federal student loans were administered by private banks and loan companies. After the bill passed, the Department of Education took over the responsibility of disbursing and administering all federal student loans. This change was for the best: according to coverage from The New York Times, the shift is expected to save some $68 billion over 11 years. That savings should, in theory, be used to bolster the federal government’s grand aid program, especially the grants for low-income students. If this comes to fruition, the student loan program overhaul could provide low-income students with increased access to grants that could help them attend school.

Private companies can still provide student loans, of course, and many private companies might still collect payments and otherwise service a federal student loan. But, these companies will no longer be involved with handing out the original money. All of that money comes directly from the federal government, in order to best serve students.

Different Costs

In the past, Congress has dictated the interest rate on federal student loans, which has usually resulted in year-to-year changes in interest rates, and thus the policy has caused some uncertainty for students. It was hard to know, from one year to the next, how much new loans might cost, and if the government officials couldn’t agree on a fee, their loans might be delayed. The newer bill ties the interest rate to the financial markets¾specifically the yield of 10-year Treasury note, a low-risk government security sold by the government and banks¾so no haggling is required. In addition, the amount a student agrees to at the beginning of the loan is the amount that student will pay through the life of the loan. There are no surprises.

In 2013, Fox News reports, undergraduates will save an average of $1,500 on interest, all due to these changes. If the Treasury note saw wild fluctuation and its yield worsened, students would wind up paying more for their loans¾but the economic conditions that would cause the Treasury note to perform very poorly would have far broader and more alarming consequences for the national and global economy, so hopefully this will not happen.

New Payments

The legislation also includes rules that can allow students to:

Bundle multiple federal loans into one loan

Tie payment amounts to disposable income

Apply for deferment, so they can hold off payments for a time

Apply for forbearance, so they can skip payments due to extreme hardship

Apply for balance forgiveness after a set period of time

These little bits of law could allow students to significantly reduce their student loan burden over time, and they might even make monthly budgeting easier for some students. The eligibility for these various programs can vary, however.

More to Come

Sweeping legislation like this can be hard to understand, and it’s not uncommon for parts of the change to appear in the months or even years that follow the bill’s signing. It’s clear, however, that federal loans aren’t the same, compared to years past, and that at a high level, students could really benefit from the revisions.

Federal loan information: All colleges participate in the Direct Lending program, which means a student enrolled at that school receives their federal student loans (including Stafford, PLUS and GradPLUS loans) directly from the school instead of from a lender.